Australia should debate the pros and cons of overseas expansion by the financial services sector, a key global adviser to the government's financial system inquiry says.

Andrew Sheng, a member of the inquiry's international advisory panel, said the probe would inevitably examine commercial pressures for greater financial integration between Australia and Asia.

Parts of the industry are eyeing growth opportunities from Asia's middle classes and using the inquiry to push for sought-after changes, such as favourable tax treatment of investments in overseas banks.

But Mr Sheng said the inquiry must have a ''very clear-eyed, very objective'' debate about financial integration with the region, including the risks it may pose.

''Financial services bring the opportunities for profit and jobs, particularly in promoting credit, trade and investments,'' he said.

''The other side is, of course, risks, such as credit, liquidity and foreign exchange and other risks that come from connectivity and interdependence.''

Advertisement

Mr Sheng stressed it was not his role to make recommendations on whether Australia should aim to expand the size of its financial services sector by pushing into Asia. Instead, he said, the issue required a cost-benefit analysis, after the global financial crisis highlighted how quickly instability could spread through the world financial system.

''If the market's going in a certain direction, which seems the way, that means even closer ties between Australia and Asia in terms of finance and economics and trade. Therefore to what extent could financial services be helpful in a properly risk-managed manner?'' he said.

Mr Sheng, a former Hong Kong regulator and central banker, is the only member of the international advisory panel from a regulatory background. He was speaking to BusinessDay before a speech by inquiry chairman David Murray on Thursday, his first substantial public comments since submissions were released last month.

Mr Sheng's comments come amid debate on whether a bigger financial sector is good for the economy.

A submission by Ron Bird and Jack Gray of the University of Technology, Sydney, cited a growing number of studies questioning whether growing financial sectors benefited the broader economy.

Bank for International Settlements economic adviser Stephen Cecchetti said in 2012 that finance became a drag on an economy once it surpassed 6.5 per cent of value added. In Australia, financial services account for more than 9 per cent of value added after almost doubling over the 25 years to 2013, according to a submission by the Reserve Bank.

For its future growth, much of the local industry is looking to Asia's growing middle classes. The Reserve last year also cautioned banks against rapid expansion in the region, after their exposure to the region increased fourfold since 2009.

Mr Sheng said the predecessor to the Murray inquiry, the 1997 Wallis inquiry, had been highly influential in Asia and the current project would also be followed closely.

Critics have claimed the present inquiry will draw too heavily on the views of industry, given Mr Murray's former role as a Commonwealth Bank boss and two panel members having worked in finance.